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As Saudi Arabia Reforms, Its Neighbors Will Need to Adjust

Saudi Arabia, unfairly or not, long has been considered by many in the investment community as an unattractive destination for their funds and by expatriates as a difficult place to live. Foreign investors have complained about the lack of adequate transparency, and many professionals who worked and lived there did so despite, and not because of, the quality of life on offer. In fact, until recently, a posting to the kingdom by major Western companies and diplomatic missions came with the provision of a so-called “hardship pay,” to compensate for the supposed deprivation their staff would have to endure. Such perceptions had left Saudi Arabia at a disadvantage when it came to attracting investment and talent. Many expats preferred to be based in neighboring countries, flying in to the kingdom only to conduct meetings when necessary.

This now is all changing, and neighboring countries in the Gulf will need to adapt to a new economic, business and social paradigm instigated by liberalization in Saudi Arabia. But this should not be seen as a zero-sum game, for the changes in Saudi, by their prompting, will ultimately augur well for the region as an entirety.

In the past two years, the kingdom has been implementing a series of social and financial-sector reforms that signal a marked change in public policy.

It is important to state at the outset that almost none of the reforms being introduced are explicitly political in nature, although giving women greater agency in their lives is both a social and a political act. There is no doubt that the government’s easing of social restrictions will result in an increase in the quality of life, bringing Saudi Arabia closer to the norms of its neighboring states. This shift in officially sanctioned social standards means that Saudi is slowly narrowing the social gap with fellow Gulf states and regional countries.

Next, with a gross domestic product of over $600 billion, Saudi Arabia is already a massive economy. It is larger, in fact, than any other Arab state and only behind Turkey in the Middle East. According to a World Bank report last year, “Saudi Arabia carried [out] the largest number of [financial] reforms in the Middle East and North Africa region.” Saudi Arabia’s economy, thus, is primed to grow even larger.

The kingdom also is the only Arab state to be part of the G20 group of the world’s biggest industrial nations, and will host its summit meeting in 2020. Gone, too, are the days when Saudi Arabia might, for example, turn down a seat on the UN Security Council, as it did in 2013. The new Saudi Arabia is keen to project both soft and hard power as and when it feels this will serve its interest. Saudi Arabia, thus, is ready to play a bigger role on the global — and not just regional — diplomatic stage.

Against these prospective changes, it is worth noting that, already, Saudi Arabia is the only Gulf state that has not been shy about opening up its citizenship to immigrants. The country can afford to do this partly because of its large population base of over 20 million; its people do not feel threatened by the addition of a few thousand naturalized citizens each year. These new citizens, most of whom come from Muslim countries, are compelled to speak Arabic because of the nature of life transacted in the country. Thus, they culturally assimilate more easily, in contrast to the situation in other Gulf states, where other languages compete with Arabic. Moving forward, this will help mitigate residual hesitancy about living in the country, particularly among non-Western expatriates, and allow it to profit from a broader, and more permanent, talent pool than its neighbors.

Should the other Gulf states be concerned that Saudi Arabia’s economic rise will affect their own prospects? On one hand, this is largely a case of the rising tide that lifts all boats. As the Saudi economy grows, neighboring states will benefit from increased exports and investment opportunities. On the other hand, Saudi Arabia’s economic advance, unless met with equally rapid reforms by smaller Gulf states, could leave them at a disadvantage. They must match Saudi’s liberalization.

The adjustments the other Gulf states must make to maintain their competitive advantage mean reforming their restrictive telecom sector, increasing corporate transparency, raising corporate foreign-ownership caps, clamping down on corruption and strongly protecting intellectual property rights. And yet other reforms include the robust protection of the rights of minority shareholders, a full guarantee of judicial independence and the better safeguarding of labor and human rights. To attract top international talent, they must also offer long-term residential visas and, yes, ultimately, may need to offer to naturalize expatriates, especially those who have invested their time and skills to grow these states. The competition for talent across the world is fierce, and the region cannot afford to handicap itself in regard to the most important commodity in globalization.

Perhaps one area where the smaller Gulf states can claim some advantage over Saudi Arabia is with regard to a more open nightlife. However, the size and diversity of the new opportunities that Saudi Arabia offers may very well start to eclipse the appeal to some of a more liberal nightlife that other Gulf states provide.

Although there is little likelihood of a stampede of businesses relocating from the other Gulf states to Saudi Arabia, the chances are that more firms will be open to being based there. A few years ago, I was on a discussion panel with a Saudi businessman who runs a large investment company. He highlighted the appeal of Dubai. “I sent an email to my staff, all 140 of them,” he told our panel. “I wrote to them: ‘Answer the following question with a simple Yes or No: Would you support our company moving in its entirety to Dubai next year?'” The businessman said he opened his email the following week and found that every single reply was a “Yes.”

It may very well be that should he send that email today, he would find a fair number of people wanting to remain in Saudi Arabia. The kingdom’s fellow Gulf states may want to mull over what that might mean for them.